ROB CARRICK

Tuesday, February 26, 2008

OTTAWA — Savers and investors, meet your new best friend.

Starting in 2009, people 18 and older will be able to put up to $5,000 per year in a Tax-Free Savings Account and rack up investment gains without paying taxes at any time, including withdrawal. You don't get a tax deduction for contributing money to a TFSA as you do with a registered retirement savings plan, but the ability to invest in almost anything and be free of taxes is a huge offset.

TFSAs will be like RRSPs in that they're designed as an administrative label that can be attached to most any kind of investment, including stocks, mutual funds, bonds, guaranteed investment certificates and savings accounts. The Finance Department envisions TFSAs as a complement to the RRSP, which is used to accumulate money to live on after you leave the work force. TFSAs, as the budget documents say, “is like an RRSP for everything else.”

Saving for a car? You can drop $5,000 into a TFSA, invest safely in a high-interest savings account and then withdraw the money any time you want without paying a cent in taxes or penalties. Once you've pulled your $5,000 out, you can re-contribute that money at any time. Likewise, you can catch up on contributions you didn't make in previous years, and you can contribute to a spouse's plan.

TFSAs will have a lot of appeal to people who are in their prime spending years. But the Finance Department expects that seniors will receive half the benefits of this plan because it will be an attractive place to invest funds they pull out of their retirement savings funds and don't need to cover living expenses. Seniors will be relieved to know that money withdrawn from a TFSA won't affect their eligibility to receive Old Age Security.

The TFSA will come as a serious disappointment to investors hoping the federal government would follow through on its election promise to provide a tax exemption on capital gains that are reinvested in six months. TFSAs will be benefit a lot more people, although the total cost to the federal government in lost taxes will be far less than if it had gone ahead with the capital gains exemption. If you invested the full $5,000 for a year in a high-interest savings account paying 4 per cent, you'd pay $80 a year in taxes if you assume a 40-per-cent tax rate. In a TFSA, your tax bill would be zero.

TFSAs will be offered by banks, life insurers, credit unions and trust companies. Here are some other budget developments of interest to savers and investors:

-The flexibility of RESPs is to be improved through measures that would allow them to remain open for 35 years, up from 25, and allow contributions to be made over a maximum of 31 years, up from 21 years.

-The taxes that individual investors pay on corporate dividends will rise slightly over the next four years to adjust for changes in corporate income tax.

-Rules for Life Income Funds – they hold money taken out of pension plans when you leave a company – are being relaxed to make it easier to withdraw money.